Today, the best founders are not going to VCs first: Ritesh Banglani

Stellaris Venture Partners, a brainchild of former Helion executives Alok Goyal, Rahul Chowdhri and Ritesh Banglani, is different from many of its homegrown peers. About one-fourth of Stellaris’s funds were raised from about 50 entrepreneurs and industry veterans, an unusually high number, who are now considered part of the fund’s ‘founder network’ that guides budding entrepreneurs. Besides, this $100-million fund—an equal partnership firm—is also Infosys’s first investment in a homegrown venture capital (VC) fund. The partners talk to Forbes India about the genesis of Stellaris, cultivating the founder network and challenges of raising a new fund. Edited excerpts:

Q. Why did you part ways with Helion?
Goyal: All of us wanted to set up a version 2.0 of venture capital in the country. In early 2015, all the partners at Helion started thinking about what a venture firm should look like in five years. We began to form opinions and that created a lot of debate. For the three of us, there was a fair degree of alignment on how the fund should look like. It wasn’t a similar alignment across the entire team.

Banglani: I would like to stress that the amount of respect we have for the founders of Helion is very high. We believe that together we had created a compelling brand for entrepreneurs and we are all proud of what we achieved. But, at some point, you realise that you cannot continue in a partnership after considering and debating multiple avenues to make it work. There was no acrimony, but differences.

Q. What will version 2.0 look like? How has the VC environment changed in the last decade?
Goyal: Ten years ago, very few people had a cheque to write. Gone are those days. Today, you and me won’t even know where the best entrepreneurs are sitting. Also, the expectations of entrepreneurs are changing fast. Today, they expect you to make customer introductions, interview employees, etc. There is a premium on operating experience.

Chowdhri: Exit is an important factor. Investors have identified bright companies and nurtured them, but they haven’t done a good job of exiting those companies. We need to change the way exits happen. Limited partners invest in us, hoping that they will get good returns. We need to complete that cycle.  

Another important point is that the carry should get equally distributed. It is not only true for the three of us, but also for a fourth partner. All the partners should feel they are taking equal ownership of the firm.

Q. Fundraising hasn’t been easy of late with limited partners becoming cautious because of lack of exits. How was your experience?
Banglani: It has been a tremendous learning experience. We were part of Helion’s fundraising. But, we realised that raising a first fund (for Stellaris) was different from raising a fourth fund (for Helion). For a fourth fund, you answer questions on track record and performance and not on personal relationships with the partners. The most important things that investors look for are partnership, stability and dynamics between the partners.

There was a lot of uncertainty among limited partners because 2016 was a terrible time to raise money. Foreign venture capital had, to some extent, pulled back from India and there was uncertainty around what will happen to the companies backed by large ventures. But, long-term investors do not time their investments based on cycles. Instead, they try to find the best managers. India as a market has been one of the most-cited reasons by investors for declining to invest in us.

The seasoned entrepreneurs have become gatekeepers to the best deals.

Q. What was the thought behind the founder network?
Banglani: The entrepreneurship ecosystem in the country has changed. Five years ago, a founder on a fundraise had no option but to present before 10-odd venture capital firms. Today, the best founders are not going to the VCs first. Instead they are going to successful entrepreneurs for advice, a little bit of money and connections. These people (the seasoned entrepreneurs) have become gatekeepers to the best deals. Individually, the founder network members may not have a great deal flow, but if you put all the 50 guys together, they have a deal flow that is better than any VC in the country.

Goyal: The best entrepreneurs will have their way to reach successful peers. Founder network members are involved all the way from sourcing a deal to involvement in the companies we are investing in. They take advisory roles in some of these companies. When we write a cheque, we bring in some expertise. But entrepreneurs who have been there and done that have better advice to give. As we invest in a company, we pull a few people from the network to directly invest with us, which is an exposure they are taking outside their exposure in Stellaris.

Q. What is your strategy to win deals as a new fund, given that your larger peers could be chasing the same startups?
Chowdhri: Obviously, we don’t have a brand as a fund, but we do have a brand as individuals. Besides, we are leaner, so we can take quick calls. There is no doubt that we have to work harder than well-established funds. Gone are those days when VCs used to wait to be approached by entrepreneurs. The entrepreneurs have multiple choices today.

Goyal: We have to proactively reach out to companies instead of waiting for them to start their fundraise process.

Banglani: We will not win against established funds because we, for instance, know Artificial Intelligence (AI) better. We will win because we get first access to the AI entrepreneur and that is why being an early-stage, smaller, nimbler fund works in our favour.  

Q. How did you arrive at the fund size? Also, is the early stage investment space getting crowded at a time when there is clearly a lack of growth funds?
Banglani: The $100-million figure was a culmination of many things. There are funds that have $300-500 million in assets under management (AUM), some with over $1 billion in AUM, or there are those in the $20-30 million range. When you are a $500-million fund, it is impossible to focus on series A only. If you are a $20-million fund, you can’t do series A. So, we saw an opportunity for a series A-focussed fund. We will not write $200,000 cheques. Our cheque sizes will be in the $1-3 million bracket.

Second, we looked at our bandwidth. In the end, you raise as much as you can deploy. Each partner, over a three-year period, can ideally deploy about $25-35 million in series A. Third, we looked at what does it take to return money to our shareholders. The total value that our companies need to create in order to give a good exit to our investors should be in the $2-4 billion range. I can see ourselves delivering that value.